Accounts receivable is money owed to you (aka Credit Sale) for a product you’ve successfully delivered or service you’ve satisfactorily rendered. Technically, it’s something to smile about. You’ve done your part, and it’s the client’s turn to do theirs. But it’s also cash yet to be received, and you know what they say about not counting your chickens before they hatch.

Accounts receivable days – what it is

In accounting terms, accounts receivable days is the number of days an invoice is outstanding before it is collected. In a nutshell, the number indicates the effectiveness of your collection efforts when selling on credit to your customers.

To calculate accounts receivable days, the formula is as follows:

(Accounts receivable ÷ annual revenue) x number of days in a year

So if, for example, you have an average accounts receivable balance of $100,000 and an annual sales revenue of $1 million, your accounts receivable days is:

($100,000 ÷ $1,000,000) x 365

= 36.5 days

This means that an invoice typically takes 36.5 days to collect. Compare that to the industry average, which varies from one industry to another, and you can gauge how you fare in your collection efforts. So if the industry average is 45 days and your average is 36.5, then you’re doing better than most of your peers.

However, if your company’s credit policies warrant that your customers pay within 30 days, this means the credit collection measures you employ aren’t good enough.

Accounts receivable days can also be used to compare your collection efficiency month by month, year over year, and so on.

Accounts receivable days vs. accounts payable days

Keep in mind that accounts receivable days is derived from a set of outstanding accounts receivable balances for a specific period and, therefore, does not measure the collectability of individual invoices.

Accounts receivable days is useful in relation to other accounting metrics, such as accounts payable days. Accounts payable days determines how long it takes for an organization to settle their short-term payables. If your accounts receivable days is less than your accounts payable days (e.g., 36.5 days and 60 days, respectively), this means your clients pay what they owe you before you’re even required to pay your own suppliers.

This is good because:

  • Since you now have the funds to pay your supplier earlier than expected, you can negotiate a discount.
  • You can readily ramp up production because you have available cash to cover the costs.
  • No need to chase late payments. Instead, you can focus on strengthening customer relationships and growing the business.

How to reduce your accounts receivable days

A low accounts receivable days number keeps your cash flow and bottom line healthy. If your accounts receivable days is higher than what you prefer it to be, there are several ways to bring it down:

  • Bill early. Bill your customers immediately upon job completion or goods delivery. Don’t wait for the first of the following month.
  • Send well-timed payment reminders. Or call them a few days before their payment is due to make sure they don’t forget.
  • Be quick to follow up. The day after the due date and a customer still hasn’t paid, follow up straightway.
  • Review your credit policies. Know your customers well. Only extend credit to those that are financially capable.
  • Use credit management software. Among other things, credit management tools automate customer invoicing, send out reminder letters, and flag overdue accounts.
  • Hire a third-party collection agency. Involve a lawyer or an agency to facilitate debt collection.
  • Take the goods back. If push comes to shove, oblige the customer to return the goods supplied to them.

How Apruve can help

Credit management is as tedious as they come. Thankfully, there are services like Apruve that specialize in B2B credit management, so you don’t have to handle the entire process alone.

Aside from automatically setting your accounts receivable days to one by getting you paid within 24 hours, Apruve takes on the risk associated with extending credit to B2B buyers, handles invoicing, collections, and payments, and provides a platform where buying and selling are easier.

Bottom line, Apruve takes credit management off your list of to-dos so you can work on more value-adding endeavors.

To conclude, accounts receivable days is a metric you should proactively monitor and calculate. Knowing the number and understanding its implications helps you map out plans to ensure you have the financial wherewithal to keep the business afloat any time of the year.